Member Sign In

You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating indiv idual securities.

If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.

While the auto sector has been performing well lately, there are many headwinds that raise concern. Chief among these are the high expenses related to auto recalls. Sales growth in the U.S. is also slowing down, while recovery is Europe is slackening.

However, there are several positives such as low gas prices and impressive China sales. Moreover, focus on vehicle safety is benefiting parts manufacturers, specifically those dealing with automotive safety products.

Still, there are plenty of reasons to be careful about the auto industry stock space for both the short and the long term. Below, we discuss some of the key challenges that investors in the auto sector should watch out for in the coming months and years.

HighCost of Safety Recalls

Safety recalls and related costs have become major issues for most automakers in recent years. Per the National Highway Traffic Safety Administration (NHTSA), automakers recalled 51.26 million vehicles in the U.S. in 2015, setting a new record. In total, automakers announced nearly 900 recalls for safety issues last year, also a new record.

The previous record for both the number of recalls and the number of vehicles recalled was set in 2014, when automakers announced 803 recalls covering 50.99 million vehicles. Notably, these figures only cover the recalls in the U.S. and the global recall numbers are much higher.

Auto recalls are set to be high this year as well, due to the defective Takata airbag inflators, which resulted in significant recalls in 2014 and 2015 too. Per Consumer Reports , the number of vehicles that need to be recalled by 2019 for defective Takata airbag inflators is over 100 million globally. It is the largest auto recall in the U.S.

A large number of recalls are also taking place due to the Volkswagen emission scandal, although these are not included in the figure given by the NHTSA as this is a standards’ violation and not a safety issue.

Strict implementation by the government and high fines imposed on many automakers for delay in reporting safety issues also prompted many companies to proactively announce safety recalls. Recall-related repair costs increase the financial burden of auto manufacturers. A massive recall can also hurt sales volume as consumers start questioning the brand’s safety.

Plateauing Sales in the U.S.

While U.S. auto sales are expected to be strong this year, many analysts believe that volumes are reaching a plateau. Pent-up demand from the recession period, which drove sales in the last few years, seems to have nearly satisfied. Following record volumes last year, auto sales have fallen in three of the eight months reported so far this year.

A large part of the decline can be attributed to falling sales of passenger cars. From January to August, passenger car sales are down 8.9% year over year in the U.S.

Slower Sales Growth in Europe

Although the European auto market is recovering, it is expected to witness slower growth this year. Per the European Automobile Manufacturer’s Association , passenger car sales are expected to increase only 5% in 2016 compared with 9.3% growth recorded in 2015.

Market Share Concentration

The majority share of the automobile market is held only by a few leading automakers. This makes the automobile sector highly competitive. The top 10 global automakers account for nearly 81% of total vehicles sold, according to marketrealist.com.

Moreover, high dependence on these automakers makes auto parts’ suppliers vulnerable to pricing pressure and production cut. Pricing pressure from automakers constricts margins of parts suppliers. Simultaneously, frequent production cuts by automakers to cope with market adjustments affect suppliers’ operations.

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Click here for your free subscription to Profit from the Pros.

Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Resources

Client Support

Follow Us

Zacks Moblie App

Zacks Research is Reported On:

Yahoo

MSN

Marketwatch

Nasdaq

Forbes

Investors.com

Morningstar

Copyright 2018 Zacks Investment Research

At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1988 it has more than doubled the S&P 500 with an average gain of +25% per year. These returns cover a period from 1988-2017. Zacks Rank stock-rating system returns are computed monthly based on the beginning of the month and end of the month Zacks Rank stock prices plus any dividends received during that particular month. A simple, equally-weighted average return of all Zacks Rank stocks is calculated to determine the monthly return. The monthly returns are then compounded to arrive at the annual return. Only Zacks Rank stocks included in Zacks hypothetical portfolios at the beginning of each month are included in the return calculations. Zack Ranks stocks can, and often do, change throughout the month. Certain Zacks Rank stocks for which no month-end price was available, pricing information was not collected, or for certain other reasons have been excluded from these return calculations.

Visit performance for information about the performance numbers displayed above.